37 Interactive Entertainment Network Technology Group (SZSE:002555) has had a great run on the share market with its stock up by a significant 6.3% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on 37 Interactive Entertainment Network Technology Group's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for 37 Interactive Entertainment Network Technology Group

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for 37 Interactive Entertainment Network Technology Group is:

30% = CN¥3.5b ÷ CN¥12b (Based on the trailing twelve months to March 2022).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each CN¥1 of shareholders' capital it has, the company made CN¥0.30 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

37 Interactive Entertainment Network Technology Group's Earnings Growth And 30% ROE

First thing first, we like that 37 Interactive Entertainment Network Technology Group has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 6.1% also doesn't go unnoticed by us. This probably laid the groundwork for 37 Interactive Entertainment Network Technology Group's moderate 18% net income growth seen over the past five years.

Given that the industry shrunk its earnings at a rate of 3.4% in the same period, the net income growth of the company is quite impressive.

Earnings growth is a huge factor in stock valuation. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for 002555? You can find out in our latest intrinsic value infographic research report.

Is 37 Interactive Entertainment Network Technology Group Making Efficient Use Of Its Profits?

37 Interactive Entertainment Network Technology Group has a three-year median payout ratio of 40%, which implies that it retains the remaining 60% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Additionally, 37 Interactive Entertainment Network Technology Group has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 33% of its profits over the next three years. Regardless, 37 Interactive Entertainment Network Technology Group's ROE is speculated to decline to 23% despite there being no anticipated change in its payout ratio.

Summary

Overall, we are quite pleased with 37 Interactive Entertainment Network Technology Group's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.